New Zealand’s Employment Relations Act 2000 (the “Act”) applies to all employees, and is predicated on “good faith” in all aspects of the employment relationship. This obligation requires the parties to an employment relationship to be “active and constructive” in establishing and maintaining a productive employment relationship in which the parties are, amongst other things, “responsive and communicative”1. The Act is intended to promote observance in New Zealand of various International Labour Organisation Conventions. The Act therefore follows a relatively protectionist approach with respect to those engaged as employees.
In contrast, no such statutory requirements of good faith or mutual trust and confidence apply to any contractual relationship in the nature of independent contracting. In essence, a contractor is subject only to the general law of contract. Importantly, a contractor is not entitled to use the mechanisms for resolving personal grievances prescribed in the Act. This article considers the differences between contractors and employees in New Zealand and the process whereby such a relationship can be re-characterised.
a. Factors that Determine Who is an Employee and Who is an Independent Contractor
The Act deals with the meaning of the term ‘employee’. Section 6 prescribes a requirement for the Employment Relations Authority when deciding whether a person is employed by another person under a contract of service to determine “the real nature of the relationship” between the parties.
Previously, under the Employment Contracts Act 1991, the New Zealand courts had placed heavy emphasis on the terms of the written contract between the parties and had tended to frame the question as “is the person who has engaged himself to perform these services performing them as a person in business on his own account?” 2
Section 6 of the Act provides the definition of an “employee”, and states:
6 “Meaning of employee
(1) In this Act, unless the context otherwise requires, employee—
(a) means any person of any age employed by an employer to do any work for hire or reward under a contract of service; and
(i) a homeworker; or
(ii) a person intending to work; but
(c) excludes a volunteer who—
(i) does not expect to be rewarded for work to be performed
as a volunteer; and
(ii) receives no reward for work performed as a volunteer; and
(d) excludes, in relation to a film production, any of the following persons:
(i) a person engaged in film production work as an actor, voice-over actor, stand-in, body double, stunt performer, extra, singer, musician, dancer, or entertainer:
(ii) a person engaged in film production work in any other capacity.
(1A) However, subsection (1)(d) does not apply if the person is a party to, or covered by, a written employment agreement that provides that the person is an employee.
(2) In deciding for the purposes of subsection (1)(a) whether a person is employed by another person under a contract of service, the court or the Authority (as the case may be) must determine the real nature of the relationship between them.
(3) For the purposes of subsection (2), the court or the Authority—
(a) must consider all relevant matters, including any matters that indicate the intention of the persons; and
(b) is not to treat as a determining matter any statement by the persons that describes the nature of their relationship.”
Accordingly, the main consideration under section 6(2), when determining whether a person should be treated as an employee, is the real nature of the working relationship between the parties, rather than the “label” given by the parties to it.3 That is made plain by section 6(3) which states that the authority is not to treat as a determining matter any statement by the parties describing the nature of their relationship, i.e. whether they have said that the relationship is that of principal and an independent contract or employer and employee.
However, at the same time, section 6(3)(a) provides that in making its determination, the authority must consider “all relevant matters” including any matters indicating “the intention of the parties”. As any written contract between the parties at least purports to record their common intention, this requires in every case, an assessment of what the parties have in fact set out in their agreement.
The authoritative decision on the application of section 6 is the decision of the Supreme Court in Bryson v Three Foot Six Limited4. In that decision, the Court stated: 5
“All relevant matters” in s 6(3)(a) ERA certainly include the written and oral terms of the contract between the parties, which would usually contain indications of their common intention concerning the status of their relationship. They will also include any divergences from or supplementation of those terms and conditions which are apparent in the way in which the relationship had operated in practice. It was impor-tant that the Court or the Authority should consider the way in which the parties have actually behaved in implementing their contract. How their relationship operates in practice is crucial to a determination of its real nature. “All relevant matters” equally, clearly requires the Court or the authority to have regard to the common law tests.”
In that passage the Court referred to the application of the “common law tests”. Bryson and Koia v Carlyon Holdings Limited 6 are authority for the proposition that, in addition to considering the intention of the parties, the real nature of the relationship can be ascertained by applying the common law tests of:
- integration; and
- the fundamental test of whether the person performing the services is doing so on their own account.
Bryson and Koia have made it clear that none of these tests can be considered decisive in its own right and the circumstances and facts of each case must be considered as a whole in determining the real nature of the relationship between the parties. However, despite the apparent relegation of the written terms of the agreement to only one of many “relevant factors” to be evaluated, it still has considerable importance. Bryson reconciled section 6 with the need to consider the terms of the agreement this way: 7
“It is not until the Court or authority has examined the terms and conditions of the contract, and the way in which it actually operated in practice, that it will usually be possible to examine the relationship in light of the control, integration and fun-damental tests. Hence the importance, stressed in TNT, of analyzing the contractual rights and obligations.”
Accordingly, in the normal course of events, the authority will undertake an assessment of each of these tests, together with the terms of the written agreement, in forming its conclusion on the issue and will adopt a balancing of those matters in order to determine the question. Plainly, cases under section 6 are heavily fact specific.
Therefore, while statements of principle such as those outlined above assist determination of status, the intensely factual nature of cases means that trends in this area are difficult to determine.
Intention of the Parties
In assessing the intention of the parties, the authority will normally take into account
some or all of the following factors:
- whether there is any wrinen contract or statements specifically describing the nature of the relationship and containing indications of the parties’ common intentions;
- whether there have been any divergences from those terms and conditions in practice;
- whether there is any evidence of any relevant discussions or oral exchanges, conduct or correspondence;
- whether the parties have always acted consistently so as to indicate one relationship rather than the other.8
The starting point for determining the parties’ intentions is the written terms of the agreement between the parties.
As stated by the Act, the intention of the parties is relevant, but is not a decisive factor.
However, the Employment Court 9 stated: 10
“It is a very serious matter for the Authority or the Court to find, notwithstanding the clear intention of highly capable and knowledgeable persons who have equal contracting strength and sound reasons for the arrangements they have mutually entered into, that, after those arrangements have been terminated, the real nature of their relationship was completely different.”
Further, intention may be decisive where all other factors are evenly balanced. In the Court of Appeal’s decision in Bryson11 (in a passage which was not disturbed on appeal), the judge stated: 12
“The Act’s emphasis on the real nature of the relationship requires that, in cases where the real nature of the work as constituted by the agreement’s substantive terms and its objective features point clearly to an employment relationship, there will be little scope for the parties to agree that the relationship is nonetheless a contract for services. In cases where the real nature of the relationship is less certain, the parties will have greater freedom to constitute their relationship in either way.”
The degree of control a principal/employer has over the contractor/employee is an
indication of the true nature of the relationship. Historically, the test looked at whether the employee worker was subject to the over-arching control and direction of the
principal party in assessing whether a person was an employee or a contractor.
However, the importance of the control test has been diminished for some time in New Zealand. In TNT the Court of Appeal emphasized the terms of the written employment agreement between the parties and rejected the notion that the degree of control exercised by the alleged “employer” was a decisive factor in determining the true nature of the contract. It stated that while the Employment Court was correct to attach weight to the control test, it could no longer be regarded as the sole determining factor, and
could not be decisive.
Despite these statements, the control test has some remaining relevance as made clear
by the Supreme Court in Bryson. Then the Employment Court13, in assessing the control
test, asked various questions of the person’s role including:
- whether the individual was ler to his own devices;
- whether the individual had a degree of autonomy; and
- whether he could come and go from the alleged employer’s premises as he pleased.
This test considers whether the work performed by the alleged employee is an integral part of the business and whether he or she has effectively become “part and parcel of the organization”. The test has become inter-mingled with the “economic reality” test14, when it was stated:
“The issue that must be settled in today’s cases is whether the worker is genuinely in business on his own account or whether he is “part and parcel of” – or “integrated into” – the enterprise that the person or organization for whom work is performed.”
In Clark it was stated by Judge Perkins that in a situation with only a single employee/ contractor, the integration test is not all that suitable as a measure to be applied.15
Accordingly, the focus of the test is the extent to which the person is, in all respects, an integral part of the organization for which he or she works. Factors to be considered in determining this question include:
• is the person performing a role that is part and parcel of the organization?
• is the person paid a set fee or payment by results?
• does the person use their own equipment and tools in undertaking the tasks?
This test has been variously described over the years as the “fundamental test”, the “economic reality test”, and the “business test”. The test asks whether the person is in business on their own account. The authoritative formulation of the test was brought by jurisprudence16:
“Is the person who has engaged himself to perform the services performing them as a person in business on his own account? It the answer to that question is ‘yes’, then the contract is a contract for services. If the answer is ‘no’, then the contract is a contract of service.”
The test has been similarly stated by the Employment Court in another case17 where the judge stated:
“This test examines whether the person performing the services is doing so as a per-son in business on his or her own account”.
A few years later, the Employment Court considered18, in attempting to collect the relevant strands of the particular case together:
• what were the payment and taxation arrangements?;
• was the individual registered for goods and services tax?;
• was it a non-exclusive relationship?;
• did the individual have a separate business account?; and
• was the individual able to increase his profits by his own efforts?
Ultimately, the fundamental test is where the Authority collects the evidence together regarding the assessments that it has made in applying the other relevant tests. The Authority attempts to resolve any conflicts in the evidence and forms its view of what the “real nature of the relationship” between the relevant parties is in accordance with section 6 of the Act.
b. General Differences in Tax Treatment
There are fundamental differences in tax treatment for individuals characterised as employees or independent contractors. Although arguably this treatment stems from the way the parties have described that relationship and ought not to be given significant weight in describing the true nature of it. In determining whether a person is an employee under the section 6 test, the New Zealand courts have confirmed that the taxation position is not a neutral factor19. The Employment Court20 found that payment of withholding tax was not a neutral factor when determining the existence of an employment agreement, but rather indicated against a contract of service. In the same way, invoicing of services to a principal and payment of Goods and Services Tax on those invoices is also not a neutral factor and indicates against a contract of service.
In terms of treatment, every employee is required to pay income tax in the form of PAYE tax (“Pay As You Earn”). PAYE taxes are progressive and the rates at which the various taxes apply are as follows: 21
Annual income Marginal Tax Rate
up to $14,000 10.5 cents
from $14,001 to $48,000 17.5 cents
from $48,001 to $70,000 30 cents
$70,001 and over 33 cents
PAYE (as a payroll tax) is paid as the employee earns income. PAYE is deducted at source and remitted at the appropriate rate (annualised for employees) and paid to the Inland Revenue Department (“IRD”), New Zealand’s taxation authority. Accordingly, it is an employer’s responsibility to correctly calculate an employee’s PAYE, deduct that from earnings to which the employee is entitled and to remit that sum to the IRD when an employer is required to do so. An employee will not have any involvement in calculating and paying this PAYE component; that responsibility falls to their employer in managing payroll. From an employee’s perspective, there is no involvement in the mechanism by which this PAYE tax is actually paid.
An employee will also be required to make contributions towards New Zealand’s Accident Compensation Scheme by way of ACC earner levies. The rates of those levies are set annually by law and are currently: 22
|Earner’s levy rate||Maximum Income earner’s levy charged on||Maximum levy anyone can pay|
|Employee||$1.70 per $100 (1.70%)||$116,089||$1,973.51|
|Self–Employed||$1.70 per $100 (1.70%)||$113,768||$1,934.05|
All employees subject to PAYE have an additional ACC contribution deducted from their PAYE. As such, in the same way as PAYE, employees have no involvement in this calculation and remission to the IRD.
Independent contractors are not subject to the PAYE system. Depending upon the nature of the services that an independent contractor provides they may be subject to payment of withholding tax. Withholding tax implies a contract for services, as it is a form of provisional tax obtained at a lower rate than most PAYE deductions and it entitles the reimbursement of business expenses through tax returns.23 Different rates are applicable to different types of services. The party engaging such an independent contractor is required to deduct withholding tax and remit that to the IRD, however, an independent contractor remains liable for his or her own ACC earner levies and ultimately for payment of income tax above the amounts remitted through.
If a person establishes a company in order to provide their services as an independent contractor then that person will be required to pay company tax on all profits earned by the company in its financial year.
The current rate of company tax is 28 cents on the dollar for all profits earned in the 2016 income year.24 If the contractor does not trade through a company or other relevant vehicle, he or she will be liable to pay income tax at the same personal rates as an employee, set out above.
If an individual or entity is registered for the Goods and Services Tax (the current threshold above which registration is mandatory is $60,000 of turnover per annum)25 then that individual is required to levy an additional 15% as GST for a taxable supply of goods and services. The levy is required on any good or service produced and sold or supplied by the person. The individual or entity is able to claim an imputation of 15% for GST expended. The net sum of GST levied and expended is then required to be remitted to the IRD on either a quarterly or six month basis in settlement of a person’s GST obligations. In many cases, an independent contractor will be required to register for GST because their taxable supply of services will exceed $60,000 per annum.
c. Differences in Benefit Entitlement
Employees are entitled to various benefits by law as a result of their status as employees. In particular, the Holidays Act 2003 (the “HA”) provides a suite of benefits for the purposes of certain types of leave. Those forms of leave are annual holidays, public holidays, sick leave and bereavement leave.
The purpose of annual leave is to allow an employee an absence from their employment for the purposes of rest and recreation.26 An employee who has completed 12 months’ continuous employment with an employer is entitled to four weeks’ annual leave in that year and in each subsequent 12 month periods of employment.27 An employee is entitled to take a period of annual leave and to receive payment at the greater of their average weekly earnings or ordinary weekly earnings at the time at which the annual leave is taken.28 That payment is made to the employee in the period to which the annual leave relates.29 An employee who ends their employment within the first 12 months is entitled to payment of the accrued amount of annual leave at 8% of their gross earnings since they became employed.30 An employee who completes 12 months’ continuous employment, but does not take their full entitlement to annual leave is entitled to similar payment on termination of employment.31
All employees are entitled to public holidays under the HA. The purpose of public holidays is to observe certain days of national, religious or cultural significance.32 The HA prescribes 11 days which are public holidays in New Zealand for which employees are entitled to observe these days as leave from their employment.33
A person may be entitled to payment for public holidays. If the day would “otherwise be a working day” for the person (i.e. the person would be working on the day but for the public holiday occurring) then they are entitled to be absent on the day and to receive their relevant daily pay for the day.34 If the day would not otherwise be a working day for the employee then they are not entitled to payment for the public holiday if they do not actually work on the day35. If a person works on the public holiday they are entitled to time and a half of their relevant daily pay for all hours worked on the day.36 If the day would otherwise be a working day for the employee then, in addition to time and a half of their relevant daily pay for working on the day, an employee is entitled to an alternative day’s holiday to be taken at a later date in substitution for the public holiday.37
The HA provides for sick leave for employees for the purposes of recovering from sickness or illness, or to care for a person who depends on the employee and who is sick or injured.38 A person is entitled to five days’ sick leave after six months’ continuous employment, and to a further entitlement for each subsequent 12 month period of employment.39 Fifteen days’ sick leave can be carried over from one period of entitlement to another up to a total of 20 days’ sick leave in any one period.40
An employee is entitled to bereavement leave for the purposes of recognising the death of a relative or for the death of a person where it is accepted that the person has suffered a bereavement.41 For certain categories of familial relationships, a person is entitled to three days’ bereavement leave. 42 In any other case where the employer accepts that the person has suffered a bereavement, the employee is entitled to one day’s bereavement leave.43
An independent contractor is not entitled to any form of leave under the HA, because the Act applies strictly to employees.44 Accordingly, in situations where an independent contractor may wish to take leave for any of the reasons provided for by the HA it will ordinarily be taken by the person as unpaid absence.
The KiwiSaver Act 2006 (the “KS Act”) is applicable for the majority of New Zealand employees.45 KiwiSaver is a work-based contribution scheme to private superannuation accounts for individuals. Membership is voluntary for employees. If a person is a KiwiSaver member and an employee, then the person will be required to make employee contributions to their scheme.46 The employee contribution rates that an employee must elect are 3%, 4% and either 8% of gross salary or wages.47 An employer is required to calculate the employee’s contributions and deduct that at source from an employee’s pay during payroll.48 The employer is then required to remit the KiwiSaver deductions to the IRD for onward transmission to the employee’s KiwiSaver provider.
At the same time, an employer is required to make compulsory employer contributions to an employee’s KiwiSaver scheme.49 The current contribution rate is an additional 3% of an employee’s gross salary or wages.50That additional amount is required to be transmitted to IRD for onward transmission to the employee’s KiwiSaver provider.51
An independent contractor is not entitled to receipt of employer contributions to KiwiSaver as the employer contribution rules only apply to employees. However, any New Zealand citizen or person entitled to be in New Zealand indefinitely is entitled to become a member of KiwiSaver.52 Accordingly, if the person is not employed, but is an independent contractor they can still make their own contributions to KiwiSaver.53 An independent contractor can therefore maintain their own KiwiSaver scheme, but will not be entitled to any form of employer contribution.
There are various other forms of benefits that apply to employees in the form of tax credits and parental leave payments, which may or may not apply to independent contractors.
d. Differences in Protection from Termination
New Zealand’s employment framework is protectionist in the sense that employees are protected from unjustified dismissal. In essence, this protects an employee from dismissal except for cause. The limited exception to this is that an employer is entitled to terminate a person’s employment within the first 90 days of employment if an employee is employed on a “trial period” allowing for termination within this initial period.54
The Act provides that, outside a trial period, an employee may only be dismissed if the employer’s actions in doing so and how the employer acted were within the scope of what a fair and reasonable employer could have done in all the circumstances at the time the dismissal or action occurred.
The Act provides for a system of “personal grievances”. An employee has a personal grievance if, during the course of their employment, their employer takes any action against the employee which disadvantages them or dismisses them and which is not justified with reference to the section 103A test.55 Personal grievances may be raised by an employee, for determination by the Employment Relations Authority. The personal grievance system allows for reimbursement of monies lost as a result of the grievance56 and to compensation for hurt and humiliation suffered as a result of the unjustified actions by the employer.57
As they are not subject to the provisions of the Act, independent contractors are not entitled to personal grievance remedies, nor are they entitled to the protection that section 103A of the Act affords. In contrast, these individuals are only entitled to the protections that the common law provides, or are provided by the Contractual Remedies Act 1979 in terms of contractual remedies.
If an independent contractor has a claim for breach of contract for which damages are sought, he or she would be required to issue any such claim in the Courts of ordinary jurisdiction. The independent contractor’s remedies would ordinarily be the contractual remedies provided by the common law and the Contractual Remedies Act 1979. While the authority also has the power to provide for ordinary contractual remedies arising out of an employment relationship, it has access to the additional remedies provided by the personal grievance system.58
Further, the authority is empowered to order reinstatement of an employee to their former position or to a position no less advantageous to the employee in the event that they have been unjustifiably dismissed.59 Reinstatement must be a remedy claimed by an employee in order for it to be awarded by the authority.60 In determining whether reinstatement should be ordered, the authority must consider whether reinstatement is both “practicable” and “reasonable”.61 That remedy is not available to independent contractors.
e. Local Limitations on Use of Independent Contractors
There are very few limitations on the use of independent contractors in New Zealand law.
There are some limited restrictions on the characterisation or workers as employees. The Act precludes volunteers who receive no reward for work as a volunteer from being characterised as employees. The Act also excludes from the definition of an employee a person who is engaged in “film production work” in any capacity, unless the person is specifically employed on a written employment agreement providing that the person is an employee.
The film production work exception was a recent amendment to the Act, which arose in late 2010 as a result of the production of The Hobbit movies in New Zealand. The amendment related to a dispute between the producers of the films and certain New Zealand unions involved in representing various performers and others engaged in providing services to the films. The provision was intended to clarify the supposed contractual uncertainty in the film industry as a result of the Bryson decision. Individuals in the film production industry are therefore normally engaged as independent contractors rather than employees.
f. Leased or Seconded Employees
There is nothing in New Zealand law that prevents or regulates employees from being leased or seconded. Likewise, there is nothing that otherwise generally regulates the terms of “triangular” relationships. Those relationships are therefore subject to the section 6 test. However, where a person has structured their arrangement to introduce a corporate vehicle into their arrangement (or some other additional party) it is more likely that they will not be considered to be an employee for the purposes of the Act.62
g. Regulations of the Different Categories of Contracts
Should an independent contractor have issues with his or her contract and is not seeking to be declared an employee pursuant to section 6(5) of the Act, the contractor may seek to have the contract enforced by filing civil proceedings in the District or High Courts on New Zealand.